CENTER FOR GLOBAL DEVELOPMENT
Presents
Maintaining Financial Stability in Latin America in the
Midst of the Global Financial Meltdown
December 4, 2008
10:30am—12:00pm
SEIU
Conference Room 1026/28 (lobby level)
1800 Massachusetts Avenue, N.W.
Washington, DC
[TRANSCRIPT PREPARED FROM AUDIO RECORDING]
Liliana Rojas-Suarez:
Good morning. Welcome to our 19th annual
meeting of the Latin American Shadow Financial Regulatory
Committee. Many of you know the nature of this committee
and its members just to repeat and make clear to everybody
who we are. This is an independent group of researchers from
Latin America that write statements, brief statements on policy
issues that happen in the region or in the world but affect the
region and provide recommendations on independent point of
views.
The members sitting in the table today are part but not the
whole of the members of the committee. During our meetings
over the last three days we had two more members that had to
leave. Ricardo Hausmann, professor from Harvard University
and Ruth de Krivoy, former President of Central Bank of
Venezuela.
With us, right now, most likely you know everybody but Roque
Fernandez who was the former Minister of Finance in
Argentina and both President of the Central Bank of Argentina.
He’s telling me I should also add the current position that Mr.
Fernandez he is a professor at CEMA, a university in
Argentina.
Guillermo Calvo, which of course you all know and is currently
a professor at Colombia University also former Chief
Economist at the IDB. Ernesto Talvi, who I think in addition of
being the head of CERES the most important tank of Uruguay
also now has a whole diversity of titles and positions including
here with Brookings, the competition for the Center of Global
Development here in Washington D.C. Pablo Guidotti who
currently is a professor of University at the di Tella in
Argentina but also former Secretary, right? Was exact title? Of
the treasury in Argentina. Alberto Carrasquilla, currently
running an independent business but as you also might know
former Minister of Finance of Colombia. And Pedro Carvalho
de Mello who is currently a professor of a number of
universities including (Inaudible) in Brazil but associated with
many other universities both in Brazil and in the United States.
Okay, without further adieu of the presentation one more thing,
if you want to know more about us or you want to read the
previous 18 statements written by this committee you can visit
us at our webpage which is www.claaf.org it’s for the Spanish
committee the Latin American (in Spanish).
Okay. We are facing very difficult times and that’s an
understatement to begin with. This is the shortest statement
we’ve ever produced. Latins are not categorized by writing
short this time we did. So I hope you value the content more
than the length of the statement. Well the **** statement that
we wrote was last May. And it’s amazing how the situation has
changed dramatically for the worse in the world and for the
potential risk that Latin America as a region is facing. So, of
course, to begin with the committee is urging the authorities in
the region and the official community and by that we mean the
multilateral organizations to take preventive measures to
address the risk of severe deterioration of the economy
conditions. That, of course, is something that we support and
we encourage the multilateral organizations to pursue.
Now, if we were going to summarize the risk that the region is
facing and the measure of the risk we would say there are three,
right? The first one is recessionary pressures coming from the
world recession that is being experienced right now in the
industrial countries. As you know, it’s for prices are folding for
the region and that’s a major source of finance for many
countries. So recessionary pressures is the first risk.
The second one, and one that we are going to focus most of the
statement is that both the public sector and the private sector of
Latin America are facing roll over problems of their debt. Not
because something had happened in the region. Not because
some corporations are performing worse than before, but
because there has been a freeze up of the international capital
market. Even domestic market which have been developed in
the past are right now suffering from a pull off of foreign
investors. This is happening from the stock exchanges, you
might have been following what is happening in the stock
exchanges in Latin America some of them have actually
experienced a decline of over 50% and it has mostly been
because investors are pulling their sources out.
And the final source of risk is that if there is no credit, policy
makers need to react. And there are two ways to react. One is
with very painful procyclical fiscal adjustments. You have
finance well you have to adjust your expenditure. Or highly
distortive measures to deal with the lack of credit. Like
controls to capital, like nationalizations, the recent
nationalization of pension funds in Argentina is a case in point.
So the question is that all the efforts and advances that have
been made in the region are at risk under these circumstances.
Now the region right now is strong, relatively speaking, but it is
strong. It has been experiencing a period of rapid growth and
the macro economic policy in general talking about the region,
we are not talking about specific countries have been largely
adequate. But because of the complexity of what is happened
right now internationally complacency is something that should
not be allowed by any reason. And we have listed in the
statement what can happen in terms of economic indicators.
And we see the potential for a significant drop in the economic
activity, loss of jobs, rising poverty, bankruptcies in the private
sector, problems in the banking sector and even perhaps
payment difficulties by some governments of their public debt.
So this is what it at risk. And it’s huge.
So rather than going into a huge list of okay, this country
should be doing this, this country doing that. We decided to
focus our statement in realizing and recognizing that the
problem is not unique to a particular country. It is systemic and
it is global. So the solution needs to be addressed as a global
problem and therefore the solution needs to be focused as a
systemic one, okay.
Now, once we recognize that we need to also focus on another
stylized fact. In the midst of this huge crisis, investors are
undertaking a flight **** to quality and where are they going?
They are going to U.S. treasuries, U.S. treasuries. Right? ****
and bonds. Now, there is a clear preference for investors to go
there. There’s a demand for these kind of assets. So can we, in
a way, think of what to do with this revealed preference? Okay.
The U.S. government, as you know, has announced a fiscal
stimulus that is going to come up in the next month with the
next president, with the president-elect. And that’s fine, I mean
that’s the way to encourage in an anticyclical way an
expenditure in domestic demand.
But what if the U.S. can also benefit from a prevention of a
decline in export growth. Meaning what if the U.S. could rely
not only in maintaining or reviving domestic consumption,
domestically, but also from helping the rest of the world and in
particularly emerging markets not to go under. Because if they
go under there is not going to be an increasing in the demand
for products produced in the United States. Okay?
And that circumstances the committee believe that the central
challenge to be addressed by the international community is to
address the simultaneous combination of flight to quality with
the freezing up of international credit. So we have two
elements happening at the same time. International credits have
frozen and at the same time is going to treasuries. Okay? So
the proposal of this committee is to find a way of recycle back
to the region they demand for U.S. treasury bonds that have
flown from the Latin American region out of the stock markets
into the United States buying U.S. Treasury bonds. How do we
recycle back those flows to the region?
Okay. For that, the committee suggest, proposes a mechanism
and that mechanism is called, we call that an EMF, an emerging
market fund. Now, this emerging market fund is not a new
institution, it’s a fund. This is basically recognizing that we
have a number of multilateral international organizations
already in place. A simple alternative to the fund that I will
describe in a second would be to say okay, let’s recapitalize all
the multi lateral organizations and allow them to extend credit
to the different segments in the region, both the private and the
public sector. And we support that. But we don’t think that’s
enough because that takes time. Emerging market fund
basically is for the purpose of trying to **** resources very
quickly in an expedient way, but with a multilateral
organizations having a major role. It’s specifically the EMF,
emerging market fund, would channel resources through
multilaterals by purchasing assets and these assets could be
loans and bonds, arising from the following facilities that I’m
going to describe now.
And there are three kinds of situations. Okay? Let’s talk about
the private sector first. Okay? You could have companies that
have already gained access to the international capital markets
and therefore have passed what we call the market test. They
already have proven to the markets that they have the adequate
government procedures in place. For those kind of private
sector companies that face problems in rolling over their
existing debt in international capital markets the committee
recommends that multilateral such as the IFC, IIC and CAF,
channel EMF resources to provide funding or guarantees
directly to these companies.
That is one kind of companies. Now, let’s continue in the
private sector but focus on another kind of companies. What
about those companies that have rollover difficulties, are doing
well in terms of their performance not in terms of their capacity
to acquire financing, but are not active in international capital
markets. Say, they really are more kind of closed firms. And
what about the trade credit lines that have been drying up. You
know trade credit lines are incredibly important for the
operation of a number of companies not only the ones that
export directly but for the import of goods and services that are
going to be using the production of for their goods.
What about for those kinds of situations in the private sector?
In that case the committee recommends swap lines with central
funds to rechannel through the local, public, and private
banking systems. Because in that particular case you need the
activities of the local banking system to determine the
qualifications of a particular firm to actually get access to
funding. You cannot rely on the international capital market
because they don’t’ trade in international capital markets. They
are not listed there.
So those are the two situations for the private sector. But what
if the public sector now is the one that faces problems in
rolling over existing majority? Well, in order to address public
sector rollover requirement and budgetary support the
committee recommends establishing credit lines through the
IMF, the IDB and the World Bank. At the minimum we think
that the objective of this line is to provide the financing to
ensure if neutral fiscal response. But the committee is also
aware that there might be a need to get financing to go farther
in neutral fiscal policy and maybe what we could also be
financing is moderate counter cyclical fiscal policy with the
underlying or moderate. To rechannel for example through
temporary investment, tax credit, accelerated depreciation
regimes, lower tax rate rather than public spending because our
concern is increasing public expenditure are much more
difficult to make on a temporary basis.
How much is it needed for this facility? Well this is a very
difficult question to ask and also it’s very important to say at
this point in my presentation and I’m sure that several other
members are going to stress that we do not think that at this
precise moment we have all firms and governments in Latin
America running and say okay we need to roll over my debt
right now, I am having problems. That is not the role of the
committee. The role of the committee is to suggest in advance
preventive actions.
So we think that the facility should be ready to be taken so the
people, that governments and private firms should actually have
access to a facility like a credit line that you only use when you
need that you already have the credit line in place. And our
estimate is that about $250 billion is a good estimate of what
could be required to address the potential roll over needs and
budget support that the region might need in 2009. But again,
I’m underlining the fact that this is on the preventive not that
we are saying okay the region right now is facing a shortage of
250, we are not saying that. It’s just this statement is focused
on the risk this region is facing, therefore to address the risk
that might materialize we are proposing a facility that if you
subscribe to the facility and the risks materialize you actually
have access to prevent those risks from materializing.
Finally we conclude the statement - and I’m sure that my
colleagues are going to compliment what I haven’t said or
explained clear enough - that in these times, in the past when
we issued the statements about Latin America we were focused
on Latin America, Latin America. But we are now focusing on
global circumstances right. And so the risks of not addressing
the kind of issues that we are putting on the table with emphasis
on Latin America actually create a significant risk for the global
economy. Unless the recycling that we have proposed, the
recycling of funds to emerging markets we use Latin America
as an example and also because we have the number of 250 that
we have in mind for Latin America, right? But this is generally
true for all emerging markets.
So unless the recycling of funds to emerging markets is
effectively implemented countries may be forced to adopt
import restrictions, capital controls in an attempt to reduce
external financing needs and impose a **** on capital flight to
force domestic residents to save to direct their savings to
domestic assets.
The problem with all these is that in the absence of adequate
international actions they (inaudible) policy response might be
politically inevitable undermining the basis of global
cooperation that was established in the aftermath of World War
II and that have actually made possible the fast raise of growth
and trades and income and the reduction of global poverty. To
finalize the message, to just round out the message, the risks are
huge. For the region most of them have not yet materialized.
But as we are all aware. I mean nobody can say, nobody can
say that people are not aware of the risk. That these things are
not being taken into consideration if you are facing important
risk that could actually lead to a severe problem in the region
than the facilities being proposed, an emerging market fund that
actually manages a number of facilities that uses the desires of
the world to hold U.S. treasuries. That is a explicit desire that
is taking place as we speak.
And the fact that the number of multilateral organizations are in
place to find a mechanism to quickly, quickly in a very, very
prompt way to allow to offset the lack of financing that could
otherwise been available under normal circumstances. Okay,
having said that why don’t I first ask anybody of the committee
that wants to compliment, clarify and then we’ll open for
questions. Pablo..
Pablo Guidotti:
Let me just, I want to summarize what I think are the
main messages that we want to transmit, okay? First the fact
that the region comes from a relatively long period of rapid
growth implies that in many countries we see that authorities
have not really understood how serious potentially this situation
and the downturn is for the following year. So our first I think
strong message is to actually national authorities. To call
attention that they have to prepare. Okay? And also to the
official community in the sense that we may underestimating
the problems I had.
The second main message I think and why we are talking about
a global approach that although the region has seen many crisis
in the past, the Asian crisis and so on, this one is a little bit
different.
First of all, as happened in the past we know that capital
account disruptions are particularly serious with very large
potential consequences in terms of loss of output. But the
situation here is different because in the past, crises were
concentrated essentially in emerging markets. But the
advanced economies were doing well. Okay? Now we have
started with the advanced economies. Many have thought a
little bit innocently that there was going to be a decoupling.
But now we see what has been the deception of the capital
market is rapidly extending to the rest of the world. So we are
not going to be sort of a region that is naturally going to balance
another region that is going to face a recessionary pressure.
And the fact that the capital account disruption is so central to a
problem implies that the typical countercyclical fiscal policy
thought mainly on output fluctuations over the cycle in this case
is not going to be enough. So it’s not – we don’t think it’s
going to be useful to think that for instance, the U.S. can
resolve its own situation by simply doing countercyclical fiscal
policy at home. Okay? It’s not going to be enough if there is
not a balanced countercyclical or balanced in other regions of
the world that can actually sustain demand. And the third I
think general message is that a little bit in the spirit of the
unprecedented actions that authorities and governments in
advanced economies are taking to deal with a situation in their
own countries I think that in this case, we need to stress two
things. Scale and agility.
And this is why, first of all, whenever possible in the
instruments that we are proposing we want the help or the
action of the private sector to be challenged directly without the
intervention of our national governments. Okay? There are
some cases in which you need to have essentially the
participation of the government. But I think the establishment
of this emerging market fund is really something that is meant
to enhance the roll of existing multilaterals, as essentially the
center of expertise and the ones that have capability of
management but actually provide them with something that is
much more agile in addition of the scale.
Liliana Rojas-Suarez:
Anybody else want to add something for
clarification? Guillermo?
Guillermo Calvo: Just on the same line, there are two issues, which I think
are important on emphasizing. The first one is the fact that the
region has been coming from a very good period and there is a
feeling which is quite correct that fiscal deficit declined sharply
in the region, that inflation has decline, that the region instead
of being a net borrower like in the 90’s it became a net lender.
And so on, it may give the impression that the region will
therefore being in a much better position to withstand the
current situation.
Now, in general I would agree with that. But the issue is that
now we are facing a problem which is of a very special nature.
It’s a credit market problem. We are not used to this. We
haven’t seen anything like this from the 1930’s. So we don’t
have that in our recent experience and it’s a very different
animal. So the things that would work under normal conditions
could be counter productive. For example, why do we need to
go beyond the United States in order to make sure the
expansion in the U.S. which is intended the policy makers are
intended for that to happen here and probably they will spend a
lot of money for that to happen. Why would that not necessarily
translate into something good for emerging markets?
In the medium term, once again, I would agree that that
normally will bring about good results for everybody. But in
the short run they are lax. The impact of fiscal policy is
immediate. Therefore, as a United States grabs the available
savings in order to stimulate the U.S. economy, you are not
going to see an expansion in the U.S. economy right away.
What you are going to see is that the United States is grabbing
wealth savings in order to implement the policy. And it could,
in the short run, result in a crowding out of emerging markets.
Hopefully that’s not going to happen but it may happen. So one
has to be prepared for a situation where because the north has
such a tremendous advantage in the first place because
everybody is willing to lend to the treasury here at a zero
interest rate. While, the private sector is totally left outside the
capital market, not only in emerging markets but also here. So
here we can do something for the private sector it can attract
those savings and turn them into something which is good for
the U.S. economy in principle.
But that advantage is not shared by emerging markets. So
that’s where we come in. That’s why we think that it’s
important to have something to backstop for an emerging
market which is not available. Let me finish with just one
comment and let my colleagues continue elaborating on this.
But one point is that when you look at the importance of the
IFIs, of the World Bank, the IDB and the CAF well the loans in
2007 for the region amounted to less than 3% of the regions
investment. And normally when you have these kind of
problems and you saw that in the 1997, 1998 episodes you
would expect that a situation like this would bring about a fall
in investment of about from 20% to 30%. Not only in the
region but southern stops in general. That’s the impact that
they’ve had on investments. So you see we have started from a
very low base and so the funds that we are talking about may
look big and they are big. So to make them effective, to bring
them to life, it will require very strong political leadership and
our intention here is to provide the rationale for that to take
place.
Liliana Rojas-Suarez:
Thank you, Guillermo. Alberto?
Alberto Carrasquilla:
Thank you, Liliana. Very briefly, I just want to
emphasize a point that was made very quickly which is the
nature of the fund that we are proposing. This is not a fund that
will be fed upon new money so to speak. It will be fed by the
normal situation in which a former holder of say a Brazilian
bond does not want to take the Brazilian risk because of the
very difficult circumstances in the financial situation. But
would rather have a U.S. Treasury bond so that we would
observe the following: The Brazilian government is not able to
roll over a particular bond due say, in March of 2009, rather the
bond holder, formerly taking a Brazilian paper wants a U.S.
Treasury paper. The U.S. Treasury finds itself with an excess
demand so to speak for its bonds. What we are proposing is to
recycle those resources that were supposed to be rolling over in
all rationality the Brazilian bond or the Peruvian bond or the
Colombian bond or whatever. There is an excess demand for
the U.S. treasury bond and those are the resources that would
feed the fund that we are talking about. This is not something
that comes out of new money from the taxpayer or something
like that. It is money that in normal circumstances would not
be needed.
If we are successful there will be absolutely no problem
because if everything works fine the former holder of the
Brazilian bond will just roll over the Brazilian risk, give the
money to the Brazilian government and there will be no need,
there will be no source of funds for the fund that we are
proposing and there will be no use of funds for the fund that we
are proposing.
So it is very important to highlight the fact that we have given a
number here which comes from an estimation of the top
maximum needs that the region would need and if everything
works well, then every single country in the region will be able
to roll over its debt and there will be absolutely no money in the
fund and no money deposited in the fund and no money used in
the fund. What we are saying is if there is a situation in which
people are demanding U.S. treasuries beyond what they would
normally demand then those excess demands be recycled and
make markets work as if the situation were normal. We want to
replicate a normally functioning capital market.
Of course this fund would charge a fee. The U.S. Treasury
would charge a fee to the fund and the fund would have to pay
it and the Brazilian government would have to pay for these
resources because it makes absolutely no sense for the Brazilian
government not to pay or the Latin American governments not
to pay. As the situation normalizes the fund will be diminished
because the rollover situation would be normalized and we
expect that if an announcement is made market participants will
be aware that the rollover risks are minimized by the existence
of this global systemic recycling that we are proposing and we
want to emphasize the fact that we are not here asking for new
money from the budget or anything like that. What we are
saying is there is a anomalous situation in which a Latin
American bond holders, because of very special circumstances
may want U.S. Treasury bonds and that substitution in there
portfolios should be in the interest in the international capital
market in the interest of the U.S. economy of the Latin
American economy be recycled back to where they would be in
normal circumstances.
Liliana Rojas-Suarez:
Thank you, Alberto.
Ernesto Talvi:
Thank you, Liliana. Since the whole group and the
statement has focused on the systemic dimension I am going to
take up on something, as Guillermo mentioned and try to look
at things from the perspective of Latin America because we
have the sense that for the time being in the region there is a
little bit, this idea that why do we need all these contingent
support if we are now a region that has flexible exchange rates,
that has a surplus in the current economy thus it’s a lender to
world markets rather than net borrower. We have fiscal
surpluses in many countries of the region and therefore not a
need for fiscal financing and we have abundant reserves to the
order of $450 billion for the region as a whole.
So we are not in the situation of many countries in Eastern
Europe that are in the need of tapping these kinds of financing
simply because we don’t need them. And what I would simply
like to point to is that this may be a temporary mirage in the
sense that although things, when you take the picture, the
photograph looked like that as of today and therefore many of
the pressures that we are going to see have not yet materialized
and are not yet obvious. Once you make some very simply
back of the envelope computations you realize first that
exchange rates, although they have depreciated significantly
countries have now started to experience what Guillermo and
Carmen Reinhart have called fear of floating. Countries in the
region have spent between 10 and in some cases 20% of their
reserves already since the Lehman collapse. So that’s a lot.
Second, surpluses in the current account are going to very
rapidly become large deficits as commodity prices decline and
financing costs start to increase as they did very significantly.
And moreover, certain sectors within the economy were already
heavily in deficit in their own current accounts that were only
disguised by the fact that other sectors, essentially primary
producers were having huge surpluses. But one does not
necessarily compensate the other if somebody who was tapping
international markets runs out of credit I mean it will suffer the
consequences and the surplus sectors are not going to come to
their rescue.
But on an aggregate basis, what now looks as healthy surpluses
are going to very quickly become pretty large deficits, external
deficits. The same things happens with the fiscal. I mean what
now looks surpluses with the recessionary pressures, the falling
commodity prices and rising financial costs, very rapidly those
surpluses are going to turn into deficits.
And finally, the **** position, although in gross terms it is very
strong, once you start to look at things a little bit more in detail
and understand that most of our reserves were acquired through
sterilized intervention in exchange rate markets and thus short
term Central Bank liabilities were issued in order to purchase
those reserves. And that many countries in the regions have
heavy amortizations coming due in 2009 and 2010. Then when
you compare those reserves with the liabilities that might come
due or might come to claim on those reserves in 2009, 2010
they start to look a little bit weaker than they appear at first
sight.
So, when you add up all this, I mean, a deteriorating current
compensations and the need of external financing, deteriorated
in fiscal positions and the need of financing in order to prevent
undercutting expenditure programs. Reserves that are not going
to be abundant if the credit markets remain closed for the
foreseeable future then what today appears to be a strong
position in the next few months if things do not change
significantly can rapidly unfold into a very, very dangerous
scenario. And that’s why, and this ties up with our proposal,
we think we need to set up this fund in order to enhance, as
Pablo said, the capabilities of existing institutions to be able to
support a region that perhaps not now, but eventually and
perhaps in the near future is going to be in the need of
substantial support if things do not change dramatically in the
world economy which does not appear to be the case as of
today.
Liliana Rojas-Suarez:
Questions now?
Anybody else (inaudible)? Okay. (Inaudible)
Question #1:You concentrate on the recycled fund. But will it be Latin
America, as a region, it has been one of the most unstable
financially speaking. It is a region that has come in crisis up
and down in the last 30, 40 years. Why in the committee not
concentrate on the risk, financial risk analysis of the region? A
financial risk analysis to concentrate where the contamination
will come from outside via the banks, via the capital markets,
via ofcourse trade. And that would make more sense. Because
if we are talking about this fund we know very well. The
behavior of all the economies, the one with access to capital
market will be a different impact than the country who has
access to capital market. So the recycle will be very much
centered to a very particular number of countries.
So my question is, if the committee as a whole concentrated on
why not in risk analysis, in other words to identify very clearly
the financial risk that will happen to the region and then
propose solutions to the U.S. Treasury, whatever happened,
given the fact that we are the more financially unstable region
in the world.
Question #2:My name is Delbert Fitchett and I have worked in some of the
same places as many of you have. And I really like this idea of
emerging markets funds. Now this shows the changes that have
taken place in the structure of Latin American economies in the
last quarter century or so. It gives an opportunity to support
that kind of growth. I would just caution you on the balance
between debt and equity in terms of the resources made
available for the funds. Because many of these enterprises
really need equity support or the debt support they are already
in overly indebted situation.
But then when I went on and started reading about the support
to the public sector, I have a tremendous sense of déjà vu that I
was seeing something written in the 70’s during the petro dollar
crisis. I think we’ve learned a lot of lessons out of that whether
it be Brady Bonds or HIPC. And I would encourage you to
focus also on the opportunities or for guarantees from the
multilateral institutions, insurance to public sector debt sector
debt by the multilateral institutions. Try to be sure that there
were flows from the developing markets back into their
economies. And I think that yea, just you know, think about the
experience you went through already. Because I think there is a
lot of lessons to be learned. Thank you.
Question #3:A couple of you alluded briefly to the role of the private sector.
But then you went onto elaborate on the concept of the EMF,
which is of course the centerpiece of the proposal. I was
wondering, could you comment further on the role of the
private sector? Please elaborate on that. Thank you.
Question #4:I really agree with the committee that we are facing very
unusual capital markets these days, not only Latin America but
the rest of the world. We are also facing some, not just
problems of liquidity we are also facing some problems of
solvency. There are many firms that will have to close, there
are many adjustments that will have to be made. Not only in
the United States, in the rest of the world. So I want to ask the
committee whether you have thought about the solvency issues.
Why should we, let’s say in the United States, why we should
finance the building of firms when in fact we have a large
number of houses that are not being sold. And many of these
firms have to be, have to go to bankruptcy. Have you given any
thought to solvency issues?
Another issue that I worry to is that after crisis, if you don’t
close some firms, you allow firms that are not productive to
continue to survive and you don’t allow other firms to come up
to appear and to really be, so you have a liquidity constraint on
other firms. Have you given some thought to that, what is your
idea?
Question #5:I have a question about implementing this grand plan. It sounds
really great, it sounds very innovative. But it’s obviously, the
emerging market fund is going to, will have a huge
coordinating role in trying to work with IFIs working with the
treasury, other central banks in the advanced economies and
trying to get the resources to bare. It will obviously have to be
done on I guess a volunteer basis. Has there been some
discussion on a key actors and how they might respond to this
and how they might see the role for themselves and are you
drawing on any precedent, historically in terms of putting this
together. I would be curious where the ideas would have
germinated from?
Question #6:Gary Kleiman. I wonder if in terms of the de facto recycling
impact how expanding the federal reserve swap lines already
provided to Brazil and Mexico and the rest of the region would
differ from your EMF construct. And I always struck, what is
the responsibility of Latin American oversight authorities
themselves in this crisis? You seem to indicate that the private
sector also would have had access to this window. I guess these
will be contingent liabilities absorbed by the government. Yet
you know, we find out in retrospect what those of us who are
following it closely know that there was a lot of borrowing
done abroad particularly by banks that was used to feed credit
growth at home. We find out about all sorts of off balance
sheet derivatives, arrangements that were in place. Where does
the burden sharing lie between some sort of multilateral rescue
and you know, the Latin American public sector bodies
themselves? Their should be some division of responsibility I
would think.
Question #6:My question is you all have laid out a scenario of how to
intervene to avoid a negative cascade of events and a new
credit-connected global economy. And you alluded to the
possibility if that didn’t take place that their could be a negative
washback into other economies from downturn and imports to
Latin America. Could you take a crack at the size of that, could
you take an estimate? Because that’s part of the argument for
why it’s imperative. In other words if action is not taken of the
character you have proposed, what will be the impact in the rest
of the world if there are fewer imports, fewer demand in Latin
American region?
Liliana Rojas-Suarez:
Okay, let me start and then my colleagues will take
what I don’t address which is very good questions actually. I
think the committee will agree that these are very good
questions. Let me start with the implementation issues only
because yes, we did address in our discussions. We totally
agree that there is going to be a huge number of coordination
issues.
Remember that I first started my presentation saying that this is
the shortest statement that we’ve produced as a committee. We
voted against getting into proposing details on how to make this
actually happen. Because the first thing, of an idea, is to
actually test whether the idea as a whole, make sense or not.
Then we will think about how to deal with coordination issues.
But we do not address that here on purpose even though we
recognize that the whole thing is a coordination problem that
we are addressing, right? And so there is going to be an
enormous amount of work if this idea flies sufficiently high.
There was the question of why don’t we just increase the Fed
swap lines right? For example – and we also discussed that.
Absolutely, I mean if the Fed was going to go and say okay
here’s the swap lines for all these number of countries but we
didn’t think first that that should be just the Fed responsibility.
That there is already in place a number of institutions,
multilateral institutions that would actually address exactly
what you are asking, what is the burden sharing. We are not
assuming that when this new fund, the emerging market funds,
buys the assets issued by multilateral funds say a loan from
IMF, we’re not assuming that this comes without
conditionality. So the burden sharing is not that you are trying
to give the money for free to the country and then you know,
that’s it. No, no, no. We’re saying that there are private sector
difficulties of one nature, there are private sector of another
nature and there are public sector of another issue and this
whole thing is a burden sharing issue. But there is no way that
the first of all, the Fed is going to take the responsibility of
assessing which one is riskier than the other. Or that a fund,
like the one as proposed will have that kind of responsibilities.
We want to use an existing infrastructure in terms of the
multilateral organizations, to actually be able to address that
particular issue.
Which links to the financial risk analysis that somebody was
asking. Again, it’s not the role of the committee to go country
by country or risk by risk in each individual case. That’s why
we were talking about the private sector. We were talking
about the IFC for example, right. Because they deal with
private sector issues. They will know, not the fund, not the
committee, not the U.S. treasury, we have already in place
institutions that are precisely doing that. We are not replacing
the activities, proposing to replace activities that they are
actually are doing. We’re enhancing their capabilities in very
bad times. We don’t want to go back to the solvency issues.
Of course firms need to fail. Of course this is not a subsidy to
think that things were not working well in the first place. There
will be countries that are not eligible to participate.
As Alberto was, I think it was Alberto I can’t remember, was
addressing. The whole idea is to allow to enhance, to mimic
the normal functioning of the market. To mimic the normal
functioning of the market. Right now, what is missing is
sufficient funds to be channelized to certain government,
certain government, certain firms that are facing an external
shove that is not due to their bad behavior. We, the committee,
are not going to tell you what firms in what countries. I don’t
think that’s the role of the U.S. government in particular or any
government in particular. We think that’s the role of a
multilateral organizations already in place doing that job. We
want to enhance them, allow them through a very simple
mechanism who very basically recycles what the public wants
to hold U.S. Treasury bills.
Okay, the rest.
Next speaker:
Let me just a compliment because I think that once, one
interesting of the details, they are a large number of issues that
arise and a large number of possibilities so it’s very easy to
actually miss things. Okay? But it’s easier to actually look at
some general principles, okay.
First, in terms of instruments. Of course, we do not think they
should be limited to loans, to rollover funds within guarantees,
have a significant role. Guarantees of course can be also
designed in a way in which the risks are shared by different
actors, okay. Also we do not, of course, roll out equity. Okay?
But if there is a question of whether these resources should
always channel through the sovereign, okay? We think that is
not a good idea. Okay? So in as long as we can actually deal
with the private sector directly, that should be done. Okay?
And multilaterals, such as the IFC, have a lot of expertise in
actually dealing directly with the private sector.
Of course, there are in many cases in which that is not going to
be possible and it is going to be necessary to channel some of
the resources or the facilities through governments. But here
again, we want to stress the agility and to try to reach the
private sector directly as much as possible. Okay? So I think
that I mean that is basically…
Next speaker:
I think your answers are very comprehensive. There was
a question about if there is any precedent for these funds.
Mexico, 1995 the U.S. provided funding for $25 billion, you
remember in connection with the tequila crisis. And Mexico is
about 20% of the region so multiply that by five that gives you
$125 billion, we are talking about twice that sum. Mexico’s
problem was essentially of a different nature than this one. In
fact, the fact it’s interesting that when you have a credit
problem those that will be hit the most are likely to be those
that have a more fluid link in the financial market, in the capital
market with the rest of the world. I mean countries that are
relatively close like Argentina now probably are shielded to a
large extent.
But you see, Mexico for example losing about 10% of resource
very quickly. You see Brazil, devaluing the real from August
to now at the rate of about 60%. So it’s quite clear that the
problems have not originated in the region, of a different nature
those countries that, and also if you look around not just Latin
America. I mean who are in big trouble? In some of the
countries that you would not expect like Hungary, for example.
Like even Russia. Are countries that have, even Russia had
loss of international reserves. So those countries that
accumulated reserves could be the targets of those that are
looking for liquidity. So you can get liquidity where liquidity
is. And therefore what we are trying to do with this is protect
the country so that they don’t lose the power that they already
have through the capital market and allow them to have
relatively open capital markets.
So when you go back and think about Mexico’s 125 and realize
that this problem is of a different nature just talking about 250,
as a ballpark figure of course it’s something that we should
discuss. Not to be used, Mexico used that if you remember and
the U.S. made a lot of money out of it because the interest rate
that was charged was really very high to relative to the
opportunity cost. So that was a very successful operation for
the U.S.
Next speaker:
Just to add, very briefly, somebody asked about the key
actors. We did actually float this idea with some key actors in
the multilaterals, in the U.S. treasury and they were extremely
receptive in fact to the idea and that doesn’t mean if they
weren’t we wouldn’t have been presenting it anyway and
because that’s our role. But the fact that they were in a sense
makes these unprecedented proposals more viable from a
political economy perspective.
Swap lines by the Fed, special regimes, what we are seeing
today - swap lines are only provided for four countries, Brazil,
Mexico, Korea and Singapore. The way things are proceeding,
they are being resold through very special sort of regimes. The
IMF involvement in Iceland was supported by bilateral money
from Russia. The IMF involvement in Pakistan supported by
money from China and well, so in a sense many countries are
going to be receiving support depending on where they are and
what is the geopolitical interest of a certain country that would
be ready to support them. So, we think that this proposal, the
EMF has the ability of providing a large chunk of liquidity that
would be available through transparent rules for the emerging
market countries. And since it is a mechanism, as Liliana said,
that is intended to enhance the ability of multilaterals, to deal
with these problems and essentially has the feature of delegated
monitoring that would solve the problems of adverse selection
that person there was mentioning burden sharing and eventually
the solvency problem issue that Graciela brought up which I
think is very important.
The idea here is that there is, underlying here, there is such a
thing as an orderly deleveraging which does not imply that
restructuring and bankruptcies are going to happen but we
would like to prevent something chaotic actually from
happening. And I think that that’s the whole thing of the idea.
A big chunk of money channeled through transparent general
ways that is accessible to emerging countries and destined to
enhance the role of multilateralism through delegated
monitoring to deal with these problems as they appear. It’s not
perfect but we think it’s better than the alternatives that we are
seeing today.
Next speaker:
I will address the question of the expectation that we may
have for the (inaudible) crack down in imports from Latin
America. I believe that we have to distinguish all those
problems that are related to the rolling over of the debt and the
financing of the budget. But if we believe that there is
something that would really hurt the world and would really
hurt economic activity and would have a significant impact in
aggregate demand across country. That is if every country
decided to restrict imports from the rest of the world that is
going to be very, very difficult that will imply a deep recession
coming from the external accounts to all the economies
developed economy or Latin American or emerging economies
are going to suffer a lot coming from the trade account.
So what happened is all the things that we are talking about
either coming from the restriction in the capital market because
we don’t have access to borrowing and there is a sort of
borrowing constraint affecting demand, that will have an effect
on imports too. If we have, in addition to that, a natural
reaction of policy makers to try to close the economy, to try to
impose farther trade restriction given that they are not able to
get the financing to proceed with normal business, that will
produce farther multiplying effect on aggregate demand, across
country. And I think that when we are looking at the way of
taking this sort of exceptional view of stopping the systemic
problem that we have across the world it is that if we don’t do
nothing with respect to this other problem we will end up with a
crack down on the imports and affect the international trade in
general.
Next speaker:
Okay. One of the questions was about how to cope with
companies that let’s say got into risk by doing derivatives
operations. We didn’t discuss this during our meeting in detail,
but the basic point I wanted to make is that in a sense we have
no a situation in which the market that was in equilibrium, now
there will be a you know, excessive supply of funds in parts, in
excess demand of funds in other parts and without an interest
rate plus the risk factor for just while we have this situation of
not enough information about what is happening in the financial
markets.
What I wanted to point out is that countries like Brazil and
other Latin American we developed financial institutions,
capital markets, stock exchange, derivative exchange. We
allowed freedom of movement for capital flows and then in a
sense if you look at what’s happening, say in Brazil, there is a
kind of punishment for having developed liquid markets. So
that’s our major concern is this excess demand, excess supply
of funds in a very fast movement inside and outside the region.
Next speaker:
Very briefly on the issue of burden sharing, which I think
is very important and should be addressed very explicitly. I
could not agree more that this is a costly adjustment and that
the burden should be shared in proportion to the importance of
the individual matter that we are discussing.
Firstly, the overall framework in which we have worked is that
we are in very unusual times. This morning we found out that
the Bank of England had reduced the interest rate to a level that
was the lowest since 1694. So that gives you a very ample
window of how unusual the circumstances are. Second, if we
look at the treasury bill market and the U.S. Treasury market,
we see something that is very interesting and motivates a lot of
the way that we have thought through this problem these past
couple of days which is the fact that before the summer, say the
10 year treasury bond was about 4% yield and right now it’s
about 2.5 or 2.6% per year and one can ask why did this
happen? Why did this reduction take place? And our view is
that there is a very strong increase in the demand for this paper.
A very strong increase in the price of the paper.
And in parallel fashion there has been an even sharper drop in
proportional terms in other kinds of paper in the international
capital market. Many of that paper is issued or a lot is issued in
Latin America. The premium that is there under normal
circumstances reflects the burden sharing that should take place
in the adjustment process. So basically what we are saying is
under no circumstances should the flow, the recycling of
resources be free. We, what we are saying is it makes no sense
to have a 2.5% yield on one kind of bond which was at 4%
before the shock and then have another bond increase the yield
or reduce the price with respect to what was the case before the
shock. It makes a lot more sense and the burden sharing would
be included in the way we price the transfer of the resources,
the recycling that we call is the basic concept that we have
used, the resources and the price should be a price that makes
up for the difference in risk taking and so forth.
Let us just put a simple example if Brazil bond is due in March
of 2009 and the bondholder who used to hold the Brazilian
bond does not want the bond anymore, wants the U.S. Treasury
Bond then the interest rate on the U.S. Treasury will probably
fall a little bit and the interest rate on the Brazilian bond will
probably increase substantially. What we are saying is, use the
resources which are in excess of what is needed anyway to
channel them back into Brazil and to charge Brazil an interest
rate that reflects the burden sharing of the adjustment process.
We have space to do it because the U.S. Treasury yield is lower
than it is, than what it would be in normal circumstances let’s
take advantage of that and transfer, recycle that adjustment back
into what would be a normal function of the market as close as
we can replicate it, of course at a cost to everybody and the
spreads that make up for the difference in risk taking and so
forth.
So basically what we have discussed these last couple of days is
that under no circumstances is this a proposal for a new
expenditures or new budget items or anything like that in any
country. What we are saying is that the unusual circumstances
that we are living that by some measures date back to the 17th
century can be intelligently recycled through a facility or
through a mechanism such as the one we are presenting today.
Next speaker:
Just one question that you asked that we were just
(inaudible) that we forgot to answer you. Latin America is
about 20% of total trade of the U.S. Latin America is about
20% of total trade to the U.S. So we were just making a back
of the envelope calculation and out of this $250 billion
approximately $50 billion would be recycled back directly into
the U.S. as increased trade. I mean it would protect trade and
indirectly perhaps through the multiplier that depends on the
numbers it could go up to 100 even a little bit larger than that.
So there is a relatively big impact that could come from this
operation by preventing a severe contraction in the Latin
American economies that would directly benefit the U.S. and
therefore the use of these funds in such a way will allow for
better balanced adjustment of the global economy.
Liliana Rojas-Suarez:
(inaudible).
Okay, we have time for one more question
Next speaker:
(Inaudible) political experience on this panel not just
economic experience but this seems like an intelligent and
thoughtful proposal but it needs to be sold to political leaders.
And we have in April coming up two important events one is
the G20 meeting in the UK where sitting at the table will be
Calderon and Lula and Kirchner. And we also have the fifth
summit of the Americas coming up in Trinidad, both in April
which will be the first Western Hemisphere meeting with a new
President of the United States.
So I would like some thinking on the political side. How do
you have your own political leadership come to the table and
make the case for a procedure mechanism like the one you’re
proposing?
Next speaker:
One other topic that we discuss a lot during our meetings
was a problem that we try not to put a lot of emphasis on the
action of the IMF. So the IMF is answer to probably is going to
be too tough for many countries to accept conditionalities or
you know that all over the world the press has blamed the IMF,
I don’t believe that is true. But that is what happened in
different governments and the press. So the idea of this
emerging market fund takes precisely the in consideration the
possibility that this is going to be more easy for governments to
sit at a table and discuss than if we start from the IMF or from
the World Bank or from another multilateral organization where
the government will have a lot of discussion on who is to be
blamed because of what happened in the world. There is a
recommendation with respect to banking supervision that was
part of the Washington consensus distributed across countries.
I think we have to eliminate the diagnosis from the country.
We don’t know what happened. Of course everybody have an
explanation of what happened. But we don’t want to open, I
think, that it’s not a good idea to open the discussion of who is
to be blamed for what happened today. Let’s try to focus on the
solution. And I think this is what the emerging market fund
proposed is just lets try to solve the problem and maybe later on
historians will decide who is to be blamed for what happened in
the past.
Liliana Rojas-Suarez:
Two things regarding your question. First is that
as part of our routine as a committee we are in contact with the
region too. Like after this meeting we are going to have a press
conference with the region via telephone conference. Then we
also distribute this statement to Presidents of Central Bank,
Ministers of Finance of the entire region. And we keep the
dialogue there. But, something that is totally important here
and just as Pablo is reminding me that we have been discussing
is the essence of the importance of the leadership of the United
States here.
This will not happen without the U.S. leadership. We are
talking about U.S. Treasuries and the Fed of course. I mean it’s
the leadership of the United States that puts all these things
together. So we have two parts, being a global problem it has
the leadership that you are asking for both from the region and
from the United States. Without that, I don’t think this could
have any hope.
Okay, having said that. I want to, you want to say something
else Guillermo?
Guillermo Calvo:
A small addition to what you said. That’s a
reminder that Larry Summers spearheaded the aid to Mexico in
1995. And I think he understands very well what these
liquidity packages can do and that was a very successful, once
again, a very successful operation as I see it. So having him in
the government now I think is a plus. It makes it more likely
that we will get a good reception about this idea.
Liliana Rojas-Suarez:
Yeah and another member just reminded me that
on page two of this short statement we actually cite part of the
G20, we said the committee is encouraged by the G20 decision
to help emerging markets and developing economies gain
access to finance in current difficult financial conditions. So
this statement was written in sync with what the G20 has in
mind.
Okay, now thank you so much. Please keep in tune we will
come back and tell more about that and we really want to thank
you for your attendance today.